THEORY OF PRODUCTION

Production refers to a process through which resources are converted into final
goods ready for consumption or into intermediate goods which can be used to
produce other goods and services.
STAGES OF PRODUCTION
1. Primary production
This is the first stage of production where raw materials are extracted from land
with the help of labour and capital to produce primary goods e.g. farming, mining,
lumbering, etc.
2. Secondary production
This is the stage of production where primary productions are produced to turn
them into final goods ready for consumption e.g. manufacturing, construction, etc.
3. Tertiary production
This is where production only involves the provision of services e.g. transport,
medical services, education, etc.
TYPES OF PRODUCTIONS
1. Direct production
This is the production of goods and services for ones own consumption. It is also
known as subsistence production.
2. Indirect production
This is where one produces goods and services for selling. It is also known as
commercial production.
FACTORS OF PRODUCTION
Factor of production refers to all productive inputs used in the production of goods
and services. The major factors of production are namely: land, labour, capital
and entrepreneurship.
These factors of production can further be categorized into physical factors, none
physical factors, specific factors and none specific factors.
i.

Physical factors of production are factors which are tangible in nature

while none physical factors of production are factors which are intangible
in nature such as skills and talents.
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ii.

specific factors of production are factors of production which highly

specialized and have low mobility while none specific factors of production
are factors of production which are no specialized and have high mobility
e.g. money capital.

Capital as a FOP
Capital refers to all man-made resources used in the production of goods and
services. We have the following categories of capital:
1. Real fixed capital
This refers to the stock of all reach of fixed assets of the business which are fixed in
nature and contribute to output indirectly e.g. buildings, etc.
2. Liquid capital
This refers to the capital of a business which is in monetary form and near liquid
assets which can be easily turned into cash.
3. Working capital
This refers to the excess of current assets over current liabilities of a business. This
capital enables the business to pay its credits without financial problems.
4. Hundan capital
This refers to all productive qualities found in human beings acquired as result of
education and training.
5. Capital employed
This is the amount of money which is being effectively used in the business at a
particular period of time.
IMPORTANCE OF CAPITAL IN PRODUCTION
1. It facilitates economic growth. The presence of capital in an economy enables
rapid economic growth and achievements of a balanced growth. This is
because it increases resources, availability and enables simultaneous
investment in all factors.
2. It facilitates employment. Capital leads to increased in productivity and
investment which creates more employment opportunity.
3. It reduces dependency. The availability of capital enables a country to create
a capacity to produce all its requirements hence reducing dependence on
other countries.
4. It facilitates industrialization. The availability of capital increases the ability to
industrialize hence leading to more economic progress.
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5. It promotes factor mobility. Capital increases occupational and geographical

mobility of other factors of production which result into efficient distribution
of resources and an increase in the quantity of resources available.
6. It facilitates resource renewal. The presence of capital enables the producer
to renew his or her resources, avoid resources exhaustions and maintain high
level of output.
7. It increases production in a country with a wide use of capital, increases the
production as well as the income which widens the tax base and increases
government revenue.
CAPITAL ACCUMULATION OR CAPITAL FORMATION
Capital accumulation or capital formation refers to the process of increasing a
countrys stock of real assets.
Capital accumulation may be categorized as gross capital accumulation and net
investment.
Gross capital accumulation refers to the total expenditure on capital assets
including replacement of worn out capital assets plus the new assets.
Net investment refers to the addition on existing volume of capital assets or
expenditure on new asset.
FACTORS OR DETERMINANTS OF CAPITAL ACCUMULATION
1. The level of savings. Capital accumulation depends on the saving of the
people therefore, the higher the savings, the higher the level of capital
accumulation and vice versa.
2. Level of income. The marginal propensity to save, depends on the level of
income whereby, the higher the income, the higher the marginal propensity
to save and therefore, the higher the level of capital accumulation.
3. Interest rates. High interest rates on saving encourage capital
accumulation as people are encouraged to save while high interest rates on
loans discourage borrowing which reduces capital accumulation.
4. Level of taxation. High taxes on income property wealth discourages
capital accumulation because they reduce on dispensable income while low
income taxes encourages capital accumulation since they increase disposable
income (DY) and saving.
5. Political stability. The maintenance of law and order, security of life and
property promotes stable conditions in an economy which promotes capital
accumulation.
6. Government policy. Government policy such as nationalization has
negative effects on capital accumulation since they reduce the willingness to
sell.

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7. Mobilization of savings. Capital accumulation depends on the ability and

degree of mobilization of savings in an economy mainly through banking and
other financial institutions.
8. Level of investment. Capital accumulation depends on actual investment
therefore, the higher the actual investment, the higher the capital
accumulation and vice versa.
9. Presences of entrepreneurs. Capital accumulation depends on availability
of entrepreneurs who can organize the production, undertake risks, introduce
innovation and manage industries units.
10.
Profit levels. High profits encourage investments which increase
capital accumulation while low profit discourages investments which
decrease capital accumulation.
LABOUR AS FOP
Labour refers to all physical and mental work undertaken for a monetary reward or
it refers to all the human efforts, mental and physical inherited or acquired used in
production of goods and services for the monetary reward.
Labour is categorized as skilled labour, semi-skilled labour and unskilled
labour or productive labour and unproductive labour.
CHARACTERISTICS OF LABOUR
Labour has some characteristics that distinguish it from other factors of production.
They include:
1. Labour is perishable. Labour as FOP is more perishable than other FOP
since it cannot be stored, postponed or accumulated for the next period.
2. Labour cannot be separated from labourers. Unlike capital and land
which can be separated from their owners, labour cannot be separated from
its owner.
3. Labour is immobile. Unlike capital, labour cannot easily be transferred from
its present location to other places.
4. Labour has a weak bargaining power. Unlike other factors, the payment
of labour is usually low because it has a weak bargaining power since it cant
be stored; it is less organized and lacks reserves funds to support it when
there is no work.
5. Labour has inelastic supply. This is because labour cant be increased or
decreased if condition demands so.
6. Labour is human being not a machine. This implies that every labourer
has his own tests, habits, and feelings which must be put under consideration
by employers.
7. Labour sells his or her labourer not himself or herself. This implies that
a worker sells his/her labourer for a wage but not sells him or herself
therefore, s/he cannot be owned by the buyer of labour.
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8. Labour is the beginning and end of production. Production can only

start when labour is applied to run land and capital while the end of
production is a consumption of final good and service which is done by
labour.
9. Labour supply is regressive. An increase in wages may reduce the supply
of labour due to easy achievement of targets, preference of leisure, etc.
10.Labour is heterogeneous. There are differences between labours efficient
where some labours are efficient than other due to different skills, natural
ability and level of training, etc.
EFFECIENCY OF LABOUR
Efficiency of labour refers to productive capacity of labour which implies the ability
of a labourer to do more and better work in a given period of time. Efficiency of
labour is influenced by the following factors:
i.

ii.

iii.

iv.

v.

vi.
vii.
viii.

ix.

x.

Personal qualities of the worker. These qualities included; race,

heredity, special talents and other individual qualities. The better the
qualities, the higher the efficiency of labour.
Supplementary factors of production. The quality and quantity of
other factors of production combined with labour determine labour
efficiency e.g. land, capital, good management, etc.
Education and training. Educated and trained labour is more efficient
than untrained labour since s/he understands the job better compared to
untrained labour.
Working conditions. These conditions include, factory environment,
working hours, level of wages, prospects of promotion, job security, etc. if
such conditions are favourable, labour efficiency will be high and viceversa.
Standard of living of the workers. With the highest standard of living
in terms of nutrients, housing, medical care, closing, etc the efficiency of
labour is higher than with low standard of living.
Supervisions. Good management and supervision of labour increases
labour efficiency and vice-versa.
Political atmosphere. Where there is political instability and security of
life and property, labour efficiency will be high and vice-versa.
Welfare service and motivation offered. The fringe benefits given to
the labour influences its efficiency since it determines ones attitude to
work. Such fringe benefits include; recreation, transport, accommodation,
offerings to the workers, etc.
Climate condition. The climate of a place may influence efficiency of
labour. Very hot environment reduces labour efficiency while moderate
conditions increase labour efficiency.
Social security. Labour efficiency increases if workers are assured of
social security in case of injury, sickness, unemployment, disability or
death.
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xi.

Employer and employee relationships. Cordial and friendly relations

between employer and employees increase labour efficiency and viceversa.

ENTREPRENEURSHIP AS FOP
An entrepreneur refers to a special type of labour which organises and coordinates
other factors of production to produce goods and services.
In the modern business, an entrepreneur may be the owner of the capital or the
owner of business, the state or the manager of the business.
Roles of an entrepreneur
i.

ii.
iii.

iv.

v.

Undertaking risks. An entrepreneur bears the burdens of risks and

uncertainties in business and should be capable of venturing in projects
where insurance is possible and where returns are predictable.
Coordination. An entrepreneur should be able to coordinate all the
productive resources in order to produce goods and services.
Decision making. An entrepreneur is the highest decision maker in an
organisation. S/he undertakes innovations, introduces new commodities,
introduces better techniques of production and plans the smooth
development of the business.
Identify new opportunities. An entrepreneur should be able to identify
new opportunities for the business, facilitates unnecessary adjustment
and be able and ready to face the risk of changes.
Direct the development of the business. An entrepreneur should be
able to develop concrete plans for the development of an enterprise or
business, insures against risks and minimize uninsurable risks through
application of all risk measures.

LAND AS FOP
Land refers to all the gifts of nature which are not human, found on earth, beneath,
or above.
Land includes soils, rivers, lakes, rocks, mountains, oceans, minerals, rainfall, seas,
grasses, etc.

The payment to land is known as rent.

Characteristics of land
i.
ii.

Land has fixed supply. The quantity of land doesnt undergo change. It
is limited therefore; it cant be increased or decreased.
Land is a gift of nature. Land is not a result of human efforts but it
existed long before man.
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iii.
iv.
v.
vi.
vii.

viii.
ix.

Land is permanent. Unlike other factors of production which are

perishable, land is permanent in nature.
Land is a primary factor of production. Any production process starts
with land therefore, without land there cant be production.
Land is scarce and it has exchange value. Due to unlimited wants, a
supply of land is not enough to satisfy mans needs and wants.
Land is immobile. Unlike other factors, land cant move geographically
from one place to another.
Land is differentiated. Land differs in productivity where one piece may
be more productive than the other and therefore demand for different
pieces.
Land has inelastic supply. The supply of land cannot be adjusted
according to its demand because it is limited.
Land has many uses. Unlike other factors of production, land can be
used in very many ways depending on mans requirements.

Pricing factors of production

The prices of different factors of production depend on demand and supply of these
factors. The price of capital is interest which depends on demand and supply of
loan funds while the price of land is a rent which depends on the demand for land.
The price of labour is a wage which depends on the demand and supply of labour
while the price of entrepreneurship is a profit which depends on the costs and
revenue of the firm.
ECONOMIC RENT AND TRANSFER EARNINGS
Economic rent refers to the payment to a factor of production of which is above its
transfer earning. Economic rent can be earned by factors as long as its payment is
above its transfer earning.
In case of land all payment to its economic rent because land is a free gift of nature,
it has fixed supply and its transfer earning is zero.
Transfer earning refers to the payment to a factor of production which is capable of
maintaining it in current employment. It can also be referred to a supply price.
Calculation of economic rent
Economic rent can be calculated by subtracting the transfer earnings of a factor
from its actual remuneration.
Note: Economic rent=Actual remuneration-transfer earnings.
Examples:

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Given a market rent of 100,000 Rwf per month while the salary of an accountant is
twice as much as the market wage, calculate the economic rent earned by the
accountant.
Economic Rent= Actual remuneration-Transfer earnings
Actual remuneration= 100,000*2
= 200,000 Rwf
Transfer earnings= 100,000 Rwf
Economic rent= 200,000 Rwf-100,000 Rwf
= 100,000 Rwf
Determinants of economic rent
The economic rent earned by a factor may depend on the following factors:
1. Scarcity of factors of production. If the factor of production is not scarce
in supply. Its supply is perfectly elastic and therefore, no economic rent is
earned but where a factor is scarce, a high economic rent is realised.
2. Elasticity of supply of the factor. If supply of a factor is perfectly inelastic
all its payment is economic rent e.g. land since a factor zero transfer earning
and no alternative occupation.
3. Degree of competition. Where conditions of perfect competition existed,
economic rent is low, but if there is monopoly, economic rent is high.
4. The degree of specialization. If a factor of production is specific in nature
and highly specialized its economic rent is high but where a factor of
production is not specific its economic rent is low.
5. Elements of time. In the short run, most factors of production earn
economic rent due to inelastic supply while in the long run, transfer earnings
are realised.
Types of economic rent
1. Quasi rent. This refers to a payment to a factor of production which is
economic rent in the short run but transfer earning in the long run.
2. Ability rent. This refers to the payment to specific type of labour which is
economic rent in the short run due to inelastic supply.
3. Site rent. This refers to a payment to land due to its location.
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4. Differential rent. This refers to the payment to different plots of land due to
their differences in the productivity.
5. Scarcity rent. This refers to the payment of land due to an increase in its
demand.
6. Windfall rent. It refers to the payment to an entrepreneur which is
unexpected arising from abrupt increase in demand or abrupt full in cost of
production.
MOBILITY OF FACTORS OF PRODUCTION
Mobility of a factor refers to ability of a factor of production to transfer either from
one occupation to another or from one geographical area to another when the
conditions in the market change.
Mobility of labour as FOP
It refers to the movement of labour either from one occupation to another or from
one geographical area to another.
The movement between occupations is known as occupational mobility of
labour while the movement between geographical areas is known as
geographical mobility of labour.
However, labour can be moved within the same occupation either vertically or
horizontally where vertical mobility of labour is a movement of a worker from one
job to another in the same occupation, e.g. movement from a messenger to a typist
or from a clerk to a bank, etc. While horizontal mobility is the movement of labour
from one to another at the same level in a given industries.
Determinants of labour mobility
1. The talents. Some jobs requires special talent which cannot be acquired by
everybody therefore, such talents are required labour mobility is low and vice
versa.
2. The skills. Different jobs require different skills therefore, where highly
specialized skills are required labour mobility is low and vice versa.
3. The existence of trade unions. Labour mobility may be limited by
influence of trade unions whereby professional unions exist and limit the
entry in their professions, labour mobility will be low and vice versa.
4. The cost and length of training. Jobs which require high cost and long
periods of training have low mobility of labour while those with low cost and
short periods of training have high labour mobility.
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5. Specialization. Highly specialized labour tends to have low mobility of

labour while unspecialized labour has a high mobility.
6. The age of workers. As workers grow (older), they tend to settle down on
their jobs since mobility require training hence low labour mobility.
7. Job security. Permanent jobs are more secure than temporary jobs although
they may be less payment therefore where jobs are permanent, labour
mobility is low and vice-versa.
8. The level of advertising. The higher the level of advertising jobs
opportunities, the higher the mobility of labour and vice-versa.
9. The level of education. Highly educated labour leads to less mobile
compared to the mobile of less educated labour, therefore, higher the
education the lower the mobility of labour.
10.
Climate conditions. Geographical mobility of labour may depend on
differences in climate conditions; if conditions are uniform mobility is high
and vice-versa.
11.
Political environment. Unstable political conditions limit labour
mobility but where conditions are stable and conclusive, labour mobility will
be high.
12.
Transport and communication facilities. If wage differences exist
between occupation and between geographical areas, labour mobility will be
high but where wages are the same labour mobility would be low.
13.
Barriers in the labour market. If barriers like language, immigration
laws, employment law etc. that exist between regions, labour mobility will be
low and vice-versa.
DIVISION OF LABOUR AND SPECIALISATION
Specialization refers to an economic situation where resources are concentrated in
production of relatively few commodities in which one is most efficient.
In case of labour, specialization refers to the allocation of task among workers so
that each worker concentrates on the task where s/he is most efficient.
Types or forms of specialization
1. Specialization by craft. This is where particular groups of people
concentrate on particular crafts or activities e.g. farmers concentrating on
farming. It may also be referred to as specialization by skill.

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2. Specialization by process. This is where different people specialize at

different stages of producing a particular commodity in the production
process.
3. Specialization by region. This is where different region specialize in what
they can produce most efficiently and exchange it with other regions.
4. International specialization. This is where different countries specialize in
production of different commodities where they employ the least of
opportunity costs.
Division of labour refers to allocation of task among workers so that each worker
concentrates on what s/he can perform most efficiently.
Advantages of division of labour
1. Increases efficiency and ability of labour. As a result of division of labour
there is more repetition of a task by workers which results into more
specialization and efficiency in that task since practice makes perfect.
2. Increased productivity. Division of labour results into mass production
reduces cost of production, leads to lower prices for goods and services and
therefore, increases peoples standard of living.
3. Skill improvement. Division of labour results into development of skills
because of performing the same task over and again.
4. Time saving. With division of labour no time is wastage from changing from
one process to another, changing tools and there is continuity in work hence
saving time.
5. Minimizes cost and time of training. Division of labour reduces the cost
and time of training workers since a person is trained in operation of the
single task.
6. Increase the use of machines. Division of labour increases the possibility
of using machines at work since a single job is divided into a service of
separate operation and this results into more efficient.
7. Creation of more employment opportunities. As a result of division of
labour many occupations are created which require different skills and
therefore, creating more employment opportunities.
8. Production of better quality products. As result of division of labour
superior goods are produced since workers become perfect in performance of
their task.
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9. Development of international trade. Division of labour results into

specialization of production, where countries produce commodities in which
they have comparative advantage and import such goods with other
countries can produce with a better comparative advantage.
Disadvantages of division of labour
1. Monotony and boredom. Performing the same task always makes the work
monotonous and boring. This reduces pressure on the job, leads to
dissatisfaction, and reduces efficiency which affects production.
2. Creation of unemployment. Division of labour increases the risk of
unemployment in case the worker is laid off since s/he knows only a small
part of how to produce a good but not the all processes.
3. Over dependency. Divisions of labour increases industrial inter dependency
which results into delays in production, inefficiency and losses in case of a
break down in the process of production.
4. Loss of craftsmanship. As a result of division of labour, the use of
machines increased and labour becomes machine attendant resulting into
low skill utilization.
5. Low mobility of labour. Division of labour reduces mobility of labour since a
worker is trained to only part of the all task which makes it had for him/her to
find a similar job in another place.
6. Low skill development and lack of self-evaluation. Since many workers
contribute to produce a commodity, an individual cannot assess and evaluate
his/her efficiency in production. Workers skills will also be tired up in one field.
7. Loss of responsibility. In division of labour many workers join hands to
produce a commodity therefore, if production is not up to the requiring
standard none of the worker is held responsible because everybody
responsibility is not specific.
8. Over production. Due to division of labour, there is large scale production
which creates excess supply over demand causing losses to the producers.
9. Increases industrial strikes. When workers specialize, there is a tendency
to increase strike in the firm. This is because specialized workers cannot
easily be substituted.
FORMS OF BUSINESS ORGANISATION
A business organisation is a unity of control which participates in the production and
distribution of goods and services.
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The major types of business organisation are:

Sole proprietorship

Partnership

Co-operatives

Joint stock companies and

Parastatals bodies

i.

SOLE PROPRIETORSHIP

A sole proprietorship is a business organisation owned by only one person/

individual who contributes capital, manages the day to day activity of the business
organisation alone and takes all the profits of the business organisation alone.
Advantages of a sole proprietorship
i.

It is easier to start because it doesnt require much consultations and a lot

of legal procedures,
therefore, any person can start a sole proprietorship business according to
his/her capacity and ability.

ii.

It requires little capital and this encourage people to start their own
business.

iii.

It is independent because owner of a sole proprietorship has liberty in

decision making and can quickly implement his/her plans.

iv.

It encourages hard working and personal initiative since the owner is

responsible for all the risks and profits of the business.

v.

It is easy to supervise due to the fact that it is small in size and therefore,
all business activities can be easily supervised and without many
difficulties.

vi.

It has direct contact with customers hence he is able to establish cross

and direct relationship with his clients and can easily satisfy their needs.

vii.

It has the ability to keep business secrets which enables the business to
earn high profit.

viii.

It has a few employees and selects them personally which promotes

personal contact between employer and employee and it minimizes
disputes.
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ix.

It is easy to close since the owner is not to content to run the business by
law.

x.

A sole trade business decision making and implementation is quick since it

does not require much consultation.

DISADVANTAGES OF SOLE PROPRIETORSHIP

i.

It has unlimited liability this implies that it is free responsible for all
business debtors up to his/her personal property being sold to pay the
debts if his capital is not enough to pay up to debt.

ii.

It has limited continuality this is because the business can only exist if the
owner exists therefore, the absent of the owner can bring the business to
an end.

iii.

It cannot easily expend because of limited capital.

iv.

There is no specialization in sole trade business and therefore, the

business will not enjoy the advantages of specialization like increased
production, ability to use machine, etc.

v.

It doesnt have access to credit informs of loans because banks and other
credit institutions usually doubt his/her credit worthiness.

vi.

The performance of the business makes also is affected by the marginal

ability of the owner since the owner may be talented in certain infinities
but in others.

PARTNERSHIP
A partnership is defined as the relationship that exists between two or more persons
carrying on a business in common with a view of making profits.
For trading partnership the maximum number of partners cannot exceed twenty
(20), for professional partnership the maximum number of partners can go up to
fifty (50) while for banking business the maximum number of partners is only ten
(10).
Characteristics of partnership
i.

A partnership is formed by different types of partners such as active

partners, dormant partners, etc.

ii.

All partners contribute capital when forming a partnership.

iii.

Except in a limited partnership, partners have unlimited liability.

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iv.

A partnership is a form of a business of partner deed or agreement which

spells out the rights and duties of a partner and the terms and conditions
under which the partnership business will be conducted.

v.

In partnership shares cannot be transferred to anybody else unless other

partners gave agreed.

Types of partnership
i.

General partnership. This is a partnership in which all members or

partners have unlimited liability i.e. they are responsible to all the debts of
the business to the extent of selling off their properties.

ii.

Limited partnership. This is a partnership where partners have limited

liabilities except one who must have unlimited liability and therefore, has
more voting rights.

Types of partners
Partners are persons who have formed a partnership business. The following are
types of partners:
i.

Active partner. An active partner is a partner who contributes capital,

participates in daily management of the partnership business and shares
on the profits and losses of the business.

ii.

Dormant partner (sleeping partner). A dormant partner is a partner

who contributes capital, shares profits and losses but doesnt participate
in the daily management of the partnership business.

iii.

Quasi partner. A quasi partner is a partner who allows his/her names to

be associated with the business but neither contributes capital nor shares
the profits and losses of the business.

iv.

Limited partners. These are partners whose liability is limited to the

capital invested in the partnership business; such partners are usually
found in limited partnership businesses.

v.

General partners. These are partners whose liability is unlimited. They

are normally found in general partnership business (ordinary partnership).

vi.

Minor partner. A minor partner is a partner who has not attained the age
of an adult but enjoys the benefits of a partnership business. A minor
partner is admitted with the concern of all the existing partners and is not
liable for the debts of a partnership business except to the extent of the
capital contributed or his/her share of profit. At the age of eighteen (18)
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years, a minor partner can apply to become a major partner and he or she
will then be liable for all the debts of the partnership business.
vii.

Major partner. This is a partner who is above eighteen (18) years old
and liable for all the debts of the partnership business or firm.

Advantages of a partnership
i.

A partnership can raise more capital in form of members contributions

compared to sole proprietorship.

ii.

Partners share the partnership work and this reduces the work load of
each partner.

iii.

Partners share the liabilities and losses of a partnership business which

reduce the abundant of each partner to pay the partnership debt.

iv.

New partners can be invited into the partnership business if the

partnership needs more capital for expansion.

v.

A partnership is easy to set up since it doesnt require many legal

procedures compared to a company.

vi.

There is specialization in carrying out partnership activities since is

composed of many members who may have different talents and skills.

vii.

Partnership accounts are not required to be published to the public hence

the business information remains confidential to the partners only.

viii.

The absence of one partner may not bring the partnership business to an
end. It has assured continuity.

ix.

A partnership business has the ability to access credit facilities from

rending institutions because the responsibility of the payment rest on all
the partners rather than on an individual.

Disadvantages of partnership
i.

Partners have unlimited liabilities especially in an ordinary partnership.

ii.

Misunderstanding and disagreement among the partners may affect the

operation of the partnership if they go out of hand.

iii.

There are always delays in decision making and implementation due to

failure to agree on particular issue at the required time.

iv.

It is difficult to dissolve due to problems of distribution of assets of the

business.
Page 16 of 21

v.

There is lack of responsibility because every partner is equally responsible

in the business.

vi.

The death of an active partner can bring the partnership business to an

end.

vii.

Profits are shared among partners and this reduces the amount received
by each.

JOINT STOCK COMPANIES

A joint stock company is a corporate association of persons formed to carry out
specific function and has separate legal entity. This means therefore, that a
company exists separately from the people who have formed it. It can own
properties in its own names; it can sue or be sued in its own name.
There are two (2) types of companies that include; public limited companies and
private limited company.
1. Public limited companies. These are companies which are formed by
minimum number of seven (7) members and they have no maximum number
of members. They are usually big in size compare to private limited company.
Features of public limited companies
i.

There are formed by the minimum number of seven (7) members and
maximum of infinity.

ii.

There is free transfer of shares in public limited companies.

iii.

The public is invited to buy shares and debentures of public limited

companies.

iv.

The final accounts of public limited companies are supposed to be

published to the public.

2. Private limited companies. These are companies formed by minimum

number of two (2) members and the maximum number of fifty (50). There are
usually small in size compare to public limited company and in most cases
there originate from partnership.
Features of private limited companies
i.

There are formed by maximum number of fifty (50) members.

ii.

Their shares are not freely transferable.

Page 17 of 21

iii.

The public is not invited to buy shares and debentures of a private limited
company.

iv.

There are not required to publish their books of account to the public.

Information for a joint stock company

A joint stock company is formed in accordance with the companies act. The act
requires the minimum of seven (7) members when forming public limited company
and a minimum of two (2) when forming private limited company. In addition, the
following major documents are also required when forming a company:
i.

Memorandum of association. This document spells out the name of

the company, its purposes or objectives, types of shares and the
amount of capital the company will operate with.

ii.

Article of association. This is the document which gives the details of

the loss governed in the shareholders and it also shows how the internal
management of the company will be carried out.

iii.

Certificate of incorporation. This is a document issued by registrar of

the company allowing the company to start selling its shares and to
collect capital from the public. When company received the certificate of
incorporation it becomes a separate legal entity.

Shares of the companies

A share is a unit of capital head or contributed by an individual in a joint stock
company which gives him/her the rights to a proportion of the profits of the
company.
Different types of shares
i.

Ordinary shares. These are shares without a fixed rate of dividends and
the holders of such shares are paid their profits after all other
shareholders have been paid.

ii.

Preference shares. These are shares with a fixed rate of dividends and
holders of preference shares must be paid before other shareholders.

iii.

Redeemable shares. These are shares which can be recovered or

brought back by the company.

Debentures: A debenture is a long term loan with a fixed rate of interest head by a
company. It is a document which acknowledges that a company has borrowed a
specified amount of money from a specific person under specific terms.

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A debenture holder is a creditor to the company, earns a fixed rate of interest and is
paid before shareholders.
Advantages of companies
i.

Companies can raise more capital by selling shares to the public.

ii.

Shareholders in a company have limited liability imply that their personal

assets cannot be sold to pay the companies debts.

iii.

A company can increase its capital by issuing new shares to debentures.

iv.

Companies have the ability to borrow funds from financial institution in

case there need more capital for expansion.

v.

The absence and death of one shareholder doesnt affect the company.

vi.

A company has the ability to employ skilled and experienced labour which
improves its efficiency.

vii.

A company is recognized as a separate legal institution, separate from the

people who contribute to its formation.

viii.

A company has the ability to borrow funds from banks and other financial
institutions because it has collateral/ security in form of assets on which it
can mortgage for the loans.

ix.

Companies operate on large scale and therefore, enjoy advantages of

economics of scale.

Disadvantages of companies
i.

Formation of Joint Stock Company is complicated because it requires many

legal procedures.

ii.

In case of public limited companies, financial information is not kept as a

secret because there are required to publish their books of accounts
annually to the public.

iii.

In case of private limited companies, shares are not freely transferable

which may make it hard in terms of raising capital.

iv.

Public limited companies are affected by government interference and

policies such as high taxation.

v.

There is no direct contact between shareholders and the customers of the

company since management of companies is done by the directors who
are simply employed without much interest in companies.
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vi.

If there are no profits made, the shareholders do not gain anything from
the company. It is instead the debentures holders who gain from the
company.

LOCATION OF INDUSTRIES
Location of industries is referred to the geographical distribution of industries in
an economy.
It refers to the concentration of an industry or a group of industries in one particular
area, locality or region.
Factors influencing location of industries
i.

Availability of raw materials. Industries using bulky and perishable raw

materials are located near the raw materials and such industries are
known as root industries. Example of root industries is fishing
industries, cement industry, etc. this is done to avoid the cost of
transporting raw materials.

ii.

Presence of the market. Industries producing bulky and perishable ,

fragile and direct services are usually located near the market for finished
products and such industries are known as tied industries.

iii.

Presence of power in an area. The presence of power in an area

influences location of industries such source of power can be hydroelectric, coal gas, etc.

iv.

Presence of skilled labour. Industries may be located to an area due to

presence of cheap labour with relevant skills in order to reduce cost of
production associated with labourer.

v.

Availability of transport. Industries are usually located in areas where

there are developed transport facilities to reduce transport cost e.g. an
area near airports, railway stations, etc.

vi.

Government policy. Government may influence the location of

industries through taxation, subsidization of investors, provision of land
and direct government investment.

vii.

Industrial inertia. This refers to the tendency of new industries to be

attracted to an area where the original advantage of location has
appeared. Industries may be located in such an area due to availability
of facilities.

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viii.

Presence of commercial services. The availability of commercial

services such as banking, advertising, insurance, etc. influences the
location of industries.

ix.

Political stability. Industries are located in areas where there is a stable

political environment without wars, revolution, nationalization, etc. which
discourage location of industries.

x.

The cost of land and room for expansion. Industries are located in
areas where land is cheap and where there is enough rooms for expansion
in future.

xi.

Climate conditions. The climate in an area may be favorable for

production of particular product hence influencing location of industries
processing those products.

xii.

Availability of water resources. The location of industries which need

water their operations in influenced by presence of water sources in an
area.

Advantages of location of industries

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